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Welcome to the thread. Always good to have another option seller aboard.

When you calculate how much a trade has gone against you, you include the increase in margin AND loss of premium. This was a point I missed until a few months back. I thought you held the trade until you've lost 3x initial margin and that's not correct. You get out when the combination of margin increase and loss on the trade = 3X initial margin.

I'll give you an example that I unfortunately traded, March NG.

I sold some NGH4 6.9 Calls on 1/2/14 for $100 and an initial margin of $198. On 1/23/14, this option closed at $310 and the margin had increased to $552. As of 1/23, I was down $210 on my option and margin had increased by $354 or a combination of $564. My initial margin x 3 = $594, so I was getting close to needing to close the position.

Sadly, this option closed at $1430 the next day and margin increased to $1424. I bought my position back in at $530, losing $430 per contract on the trade.

The nuance I didn't realize until then was that if you close your position when the combination of margin increase and trade loss = 3x IM, you'll never lose 3x IM. That is, except when the market goes crazy and blows through your "stop". Which is pretty likely when there is a lot of volatility. That is just one of the negatives to this approach. But the positives more than outweigh the negatives, IMHO.

Ron99 told me that in a normal year, he has 11 decent months and one month where he takes a hit. If we're making 3-5%/month and we lose 5-10% in one month, we're still up 25-50% (or more) on the year. I can live with that.

mu2pilot

PS- You asked about Delta and I didn't provide that. Delta on 1/2 was 3.55. On 1/23, it was 6.1. On 1/24, it was 17.03. The U/L was 4.296, 4.579 & 4.998, respectively.

Mu2pilot,

Thanks for the excellent information. Just what I was looking for. So why have we settled on this exit strategy versus watching deltas for example? I studied several years of the RUT index options. I found when your delta doubles all of the sudden you better get ready to get out. If it triples you really need to close the trade. I think your trade example above shows the same thing I have seen. I did the study based on a .05 starting delta. If the delta jumps up fast it usually is signaling a strong trend against you. Most of the trades in the study I did, either hit the strike price or got to close for comfort.

I had one ES call I sold a few weeks ago with IB. The market kept going against the trade. The Delta more than tripled on me and I got out. Experience is telling me to get out at double delta. I did not see any margin change with IB. I'm glad I got out with delta on that one. It seems that IB doesn't change margin requirements much since they charge so much more than Span.

This issue worries me as well. I ran scenario in OptionVue increasing volatility by 4% and 8%, projecting 7 days in the future for three different DTE on CL with the fixed price. For each DTE I chose strike that gave me ~0.1 premium. Here are the results:

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The bottom line is no matter how far in time you go, the increase in volatility will get you. The furthest DTE is the worst because of higher vega value. However the furthest DTE carries the least risk with respect to price movement. Since in reality the vol spike will be accompanied by the price spike, both have to be considered. It does seem that 67 DTE has the best balance of both.

This agrees with what I have actually seen in a moderate sell off in the index products. You can expect your
maintenance margin to approximately double in a moderate sell off. So if you load up now with selling puts and
increase your MM in a very low IV environment you could have problems.

Thanks for the excellent information. Just what I was looking for. So why have we settled on this exit strategy versus watching deltas for example? I studied several years of the RUT index options. I found when your delta doubles all of the sudden you better get ready to get out. If it triples you really need to close the trade. I think your trade example above shows the same thing I have seen. I did the study based on a .05 starting delta. If the delta jumps up fast it usually is signaling a strong trend against you. Most of the trades in the study I did, either hit the strike price or got to close for comfort.

I had one ES call I sold a few weeks ago with IB. The market kept going against the trade. The Delta more than tripled on me and I got out. Experience is telling me to get out at double delta. I did not see any margin change with IB. I'm glad I got out with delta on that one. It seems that IB doesn't change margin requirements much since they charge so much more than Span.

Exiting on Delta rise might be a valid exit strategy. Honestly, just about any exit strategy will work provided you follow your rules and give the trade enough room to work.

Having said that, I like the 3X IM method primarily because Ron's method is one where we are selling very, very low Delta options ( < 2 ) and if you exit when Delta rises to 4, you're exiting a trade that still has a very high probability of expiring worthless.

In your approach, you're starting at 5 Delta and looking to exit at 10 or 15 Delta where you have a significantly greater risk of getting into trouble compared to me at 4 or 6 Delta.

That's just how I rationalize following this exit method. Others here probably have better reasons for using 3X IM.

Nothing at all to do with options, but interesting that on a move this big the front of the curve wasn't stronger. Front month spread lost 3c, second spread only widened 3c (Hence the front butterfly actually dropped 6c and settled at -21c.). Largest spread move was Month 5 - Month 6 at 12c.

On yet another non-options related point, NG had a nice 5.6% move today, widening 25.4c to $4.526. March/April15 widened 9.2c to close over 50c.